Sands China

Investment thesis

Providing a wide range of non-gaming offerings and operating more than 12,000 hotel rooms that account for one-third of total hotel rooms in Macau, Sands China leads in the mass-market segment with ~30% of market share. Tailwinds from the construction of Hong Kong-Zhuhai-Macau bridge, which commenced operation in Oct-18 plus the Greater Bay Area (GBA) initiatives, are set to further boost business for Sands’ mass-market and non-gaming segments. VIP accounted for only 8% of its profit which makes Sands relatively less exposed to macro headwinds. Sands’ generous annual dividend of HKD1.99/share, offers support to valuations.

Company description

Sands China is a leading developer, owner and operator of multi-purpose integrated resorts and casinos in Macau. It holds one of the six concessions or sub-concessions permitted by the Macau Government to operate casinos or gaming areas. It had a leading market share at 22.3% in 2017 in terms of gross gaming revenue (GGR). Sands China’s focuses on higher-margin mass-market, leveraging its hotel room and table inventory, which is the largest among its peers, as well as its vast non-gaming offerings (retail, convention and F&B). By segment, Sands China had a 30.2% share of the mass market in 2017 (largest player in Macau, followed by Galaxy’s 20%), and 13.6% in VIP. As of 31 December 2017, the group operated 1,660 table games and 5,293 slot machines.

The Company operates five properties in Macau - The Venetian Macau, Sands Macau, The Plaza Macau, Sands Cotai Central and Parisian Macau - as well as a ferry operation. The company’s combined properties feature 12,605 suites and hotel rooms, 19 Paiza Mansions, and 140 restaurants and food outlets. Its 1.9mn square feet of retail space houses over 800 shops, including well-known brands.

Investment summary

Expanding market share – Sands China reported results that are largely inline with flattish q/q property EBITDA of USD748mn. Management estimated that Typhoon Mangkhut in September dragged the EBITDA by ~USD15mn. Group’s gaming revenue grew 1.5%q/q, ahead of industry’s +0.2%. This is driven by continuous ramp-up in VIP business (additional table and hotel rooms to junkets) as well as resilient mass-market. Overall, Sands China expanded market share by 40bps q/q to 23.4%.

Solid mass-market and non-gaming business to weather macro headwinds. Despite the impact of typhoon Mangkhut, base-mass GGR +7% q/q offsetting the premium mass GGR -7% q/q. Non-gaming revenue grew faster at 9% q/q or 12% y/y. As market is most concerned about slowdown in VIP and premium mass-market GGR growth, Sands’ significant exposure to the more resilient mass-market and non-gaming business could better mitigate risks. Sands is likely to be a major beneficiary of robust growth in Mainland Chinese visitation as there is now better access to Macau via the HK-Zhuhai-Macao bridge and High-Speed Rail in HK.

Defensive play. Following a more prudent industry 2H18/2019 gross gaming revenue (GGR) growth assumption (lower to +6%/+1% from +12%/+11% respectively) and applying mid-range of historical valuation 14.5x 2019 EV/EBITDA (from 18x 2018 EV/EBITDA), we continue to see the growth story of Sands China. We believe its widest exposure to grind mass-market (~30% market share) and attractive dividend yield >6% make Sands the most defensive play in the sector.

Chinese demographic. Rising disposable income in China could translate to higher bet sizes and non-gaming spend.